Investors are becoming increasingly optimistic that Corporate America’s year-long decline in profits is soon to come to an end. However, any respite for equities may not last long given the shaky state of the economy, cautious consumers, and the highest interest rates in sixteen years.
According to estimates published by Bloomberg Intelligence, analysts believe the S&P 500 businesses will report a 1.2% reduction in third-quarter earnings, marking the fourth consecutive decline, before a 6.5% rebound in the final three months of the year.
In an unusual show of optimism, expectations have increased ahead of the reporting season, helping to boost the S&P 500 by 0.9% in October following consecutive monthly declines. In the event that businesses exceed those forecasts, as they typically do, third-quarter earnings could even rise.
The third quarter could see a little improvement in the S&P 500 profits outlook, but the recovery is still shaky and narrow, according to Bloomberg Intelligence chief equities strategist Gina Martin Adams. Although the pace of estimate revisions has accelerated, she stated that “for stocks to derive confidence,” margins outside the energy sector “need to firm” and the outlook for industries susceptible to the economic cycle needs to improve.
It could be difficult to find that confidence. Higher interest rates are hurting both businesses and consumers, and China’s economy, which has long been a global development engine, is having difficulty getting back on track.
These are some of the themes that investors will be analysing in their earnings reports.
Customer Expenditure
The US consumer is a major factor in determining if the earnings recovery can continue. As federal student loan payments resume and Covid-era reserves are exhausted, spending is probably going to suffer. Based on data from the Federal Reserve, credit card debt may double over the next three to four years due to the increase in interest rates.
After accounting for inflation, consumer expenditure increased by just 0.1% in August—the lowest level since March.
Retailers who serve low- to middle-class customers are more at risk since they are more susceptible to increases in inflation. The vehicle retailer CarMax Inc. fell this week as analysts expressed concerns about consumers’ capacity to afford cars, while denim company Levi Strauss & Co. lowered its full-year sales target, citing a squeeze on shoppers. Even luxury goods sales, however, are slowing, as LVMH demonstrated this past week.
There are some positive aspects, though. good demand drove up shares of Nike Inc., while Fast Retailing Co., the Japanese company that owns Uniqlo, released an optimistic prediction based on good sales in both its domestic and international markets.
Rates of Interest
Corporate America is now paying significantly more for debt as a result of the Federal Reserve’s most aggressive policy tightening since the 1980s.
According to Bloomberg Intelligence, interest expenses for issuers of dollar-denominated debt with fixed-rate exposure might increase by more than $80 billion in total by the end of 2026. Nearly half of the total is accounted for by borrowers in the financial sector, while BI strategist Noel Hebert stated in a note that Apple Inc., AbbVie Inc., and Boeing Co. each face increased interest costs of over $500 million.
Investors have reduced their bets on a dovish shift in Fed policy as the most recent data indicates that both producer and consumer prices are still high. Just a few months after analyst estimates started to rise, it will probably put further pressure on profit margins. Additionally driving up business costs are worker strikes in certain industries, where workers are demanding better wages.
The effects of interest rates and inflation take time to manifest themselves, according to Murdo MacLean, client investment manager at Edinburgh’s Walter Scott & Partners Ltd. “And it’s still happening, and it will continue to happen the following year and the year after that. Without a doubt, we anticipate that customers will be cutting back.
Adaptive Approximations
An encouraging development is that analysts’ confidence on profit growth has increased. According to Bank of America Corp., the third-quarter S&P 500 earnings-per-share forecast was revised upward 0.1% during the previous three months, as opposed to a normal decrease of 4%. The statistics indicated that this was the first time projections had not been lowered before the reporting period since the fourth quarter of 2021.
Given the continued strength of the US economy as a whole, some market observers expect corporations to exceed these projections at a faster rate than usual. BofA strategists Ohsung Kwon and Savita Subramanian stated that as inventories decline and profits outstrip growth in the gross domestic product, they anticipate a “sizeable” 4% beat rate as opposed to a typical rate of 2%.
That contradicts the results of a recent Bloomberg Markets Live Pulse survey, which indicated that investors were expecting a barrage of profit warnings this season as a result of rising yields. Company reports have been inconsistent. Due in part to rising fuel costs, Delta Air Lines Inc. lowered the upper end of its outlook for 2023 profitability, but PepsiCo Inc. increased its estimate as consumers accepted higher prices.
Although artificial intelligence caused a stir in the markets earlier in 2023, weight-loss medications like Ozempic and Wegovy are currently quite popular. GLP-1s, or appetite suppressants, have seen a sharp increase in sales, completely upending the markets for everything from food to alcohol and medical equipment. The medicines’ manufacturer, Novo Nordisk A/S, increased its revenue and profit projections on Friday once more.
Walmart Inc. stated that it is already noticing an influence on shopping demand, despite some businesses, like the creator of Pringles, Kellanova, saying it is too soon to evaluate the effect of the medications on consumer behaviour. Results for the third quarter will provide some indication as to whether an index of food stocks, which is already down 26% from a high in May, may fall any lower.
According to Infrastructure Capital Management CEO Jay Hatfield, “We believe that the impact will be gradual and that the stock selloff in many packaged food companies is way overdone. Any actual slow-down in consumption will come over the next 3-5 years.”
Impact of China
This season, the effects of China’s uneven economic recovery will also be a subject. The country’s monthly data on industrial profitability, manufacturing activity, and tourism revenue have shown optimistic trends; but, bank margins are expected to face pressure when interest rates are lowered.
According to Bloomberg Intelligence researcher Marvin Chen, “producer price deflation and generally weak demand will impact industries and materials earnings.”
Market players anticipate few significant positive surprises from the real estate industry as developers battle weak demand and attempt to reduce debt levels. After Huawei Technologies Co.’s Mate 60 Pro smartphone was introduced in August and is predicted to increase orders well into next year, suppliers may be a bright light.
Europe is more exposed to China than the US is when it comes to international markets since its miners, producers of luxury products, and automakers depend on China for a significant portion of their earnings.